Public finances

A functioning state requires a functioning system of public finances

The public finances of a country are the backbone of the state. A well-functioning public finance system ensures that the necessary funds are available for the financing of public goods such as security, education and health, and that they are used effectively to implement sustainable development goals.

The Federal Republic of Germany has an efficient system of public finances, one which for decades has made a significant contribution to the growth and promotion of equal opportunities. The system consists of several elements: An efficient revenue system ensures that fiscal revenue is generated by tax and customs revenues and that suitable framework conditions for economic growth are created. A transparent budgetary system ensures that scarce state resources are used effectively and to the greatest extent possible in order to benefit the population. Building on the internal financial control processes carried out by the public administration itself, the general accounting office acts as an external financial control body which is independent of the government and verifies the use of state resources. Efficient and accountable institutions also exist at local level to ensure the successful implementation of policies. Comprehensive financial equalisation systems support the creation of equivalent living conditions in Germany and implement an autonomous revenue and expenditure policy at decentralised level by transferring taxation powers.

The public finance system, however, faces major challenges in many countries. Opportunities to generate income are often limited, income levels are often low and the local economy is characterised by a broad informal sector. In addition, the budgetary system does not provide the necessary information to hold the government accountable for its financial conduct. Internal and external control mechanisms are inefficient and there is often a lack of an appropriate structure for national financial relations.

Many partner countries have an interest in elements of the German public finance system. Bolivia, for example, is interested in Germany’s experience with its fiscal equalisation scheme. The network of FSRP experts advises the Bolivian Ministry of Autonomy and Finance on various aspects of the design and implementation of financial equalisation. The background here is the Bolivian government’s goal to comprehensively reform the financial equalisation between the state and municipal levels in Bolivia.

In addition, reforms of the public finance system ultimately contribute to sustainable development. In particular, they support SDG 16, the establishment of effective, accountable and inclusive institutions at national and sub-national level; SDG 17, by mobilising implementation funds and strengthening the state’s ability to finance itself and SDG 10, the reduction of income inequalities through state redistribution policies such as national tax and budget systems. The state is thus able to provide its citizens with public services.

Example from Bolivia

Priority:Fiscal decentralisation

1.  Dialogue and discussion mechanisms between the state levels to negotiate financial relations

2.  An inventory of mechanisms to ensure tax revenues at diverse levels of government.

3.  Models or methods for calculating costs resulting from the allocation of competences between levels of government.